Dollar gains as US court rules many Trump tariffs illegal

The dollar strengthened overnight after a US court ruled many of Trump’s tariffs were illegal. The US trade court ruled that the President does not have the power (under the emergency law used for so called ‘reciprocal’ tariffs) to impose tariffs. This invalidates many but not all of the recent tariffs but does not include the tariffs on steel, aluminium and cars as they are in place under another law. The immediate impact of this is uncertain as the White House has appealed the decision.  The dollar held onto the gains it made on Tuesday and traded down to just below $1.1250 to the euro for a time before moving back up above that level now while against sterling the greenback also made-up ground trading down to around $1.3420 but again has bounced back to above $1.3450 now. Sterling has gained a little on the euro but remains trading close to but below 84p.

The US trade court overnight ruled that President Trump does not have the power to impose many of his tariffs. President Trump had used the International Emergency Economic Powers Act (IEEPA) to invoke reciprocal and ‘anti-fentanyl trafficking’ tariffs which the US Government argued  ‘pressured’ other countries to make trade deals, however the court ruled these were invalid as the three judges ruled all this did was burden the countries they target and exceeded the President’s authority and also did not addresses how tariffs would stop fentanyl tracking. The White House said it was not for the court to decide national emergencies and immediately appealed the ruling.  Adding to uncertainty, it is not clear how quickly this decision takes effect with the court give the administration 10 days to remove tariffs and, in addition, the Trump administration has been accused of not fully obeying court orders in the recent past.  Tariffs on steels, aluminium, cars, solar products and some goods from China are not covered by the ruling as these were imposed under other trade acts. While this is a setback for the Trump Administration, they will appeal and ultimately this is likely to end up in the US supreme court. In addition, Trump may simply move to make use of other trade acts to impose tariffs rather than the IEEPA. The Republican led Congress could also pass acts giving Trump more tariff powers but the impact of widespread tariffs on the US economy may temper appetite from some to give Trump more powers.

In bond markets, yields reversed course somewhat with US 10-year yields up 4bps to 4.48% having fallen for three days from 4.6% last Wednesday while equivalent UK and German bond yields were also up yesterday by 6bps and 2bps to 4.73% and 2.55% respectively. Yields are ticking up further on the open this morning. Equity markets struggled with the S&P 500 giving up some of Tuesday’s gains, closing down 0.6% for the day, though a better than expected earnings report from Nvidia, which came after market close, boosted futures and may help spur stock gains today especially in tech. The Trump tariff ruling has also sent US equity futures higher overnight and in Asian markets, equities gained strongly with the Nikkei up 1.9%.

Though the ECB appears confident it is returning inflation to target, consumer expectations 1 year out are ticking up. Inflation expectations 1 year ahead rose to 3.1% in April from 2.9% in March, which is the highest level since February of last year. In better news for the Governing Council, expectations 3 and 5 years out were unchanged at 2.5% and 2.1% respectively. So consumers do not believe the ECB has tamed inflation in the short term – even though the most recent data shows inflation was 2.2% in April and likely to ticked back to 2.0% in May- but remain confident the Central Bank will return inflation to target over the medium term. Separately, the ECB survey showed that consumers do have a gloomier outlook for the economy, thanks no doubt to tariff uncertainty, with consumers expecting Euro Area activity to slow and unemployment to rise in the next 12 months.

The minutes from the last FOMC meeting in May showed the committee is in no hurry to cut rates and it’s taking a patient view given current uncertainty.  Most members said the risks of higher unemployment and inflation had risen since the previous meeting in March, due to the impact of tariffs. The minutes stated that participants agreed that with economic growth and the labour market solid and current monetary policy restrictive, they were ‘well positioned’ to await clarity on the outlook.  The minutes also said the Committee agreed ‘uncertainty about the economic outlook had increased further’ and it was ‘appropriate to take a cautious approach’ until the net economic effects of the array of changes to government policy became clearer. The FOMC has stayed on hold for all of 2025 to date and, as Fed Chair Powell has said, tariffs could push inflation higher and growth lower giving the central bank a headache given its dual mandate. Ultimately, tariffs will bring weaker growth and higher unemployment and we think the Fed will ‘look through’ higher inflation and cut rates but not until into Q3 of this year.

Looking to the day ahead, on the data front we get a revision to US Q1 GDP and initial jobless claims as well as pending home sales. On the speaker slate, we have a number of Fed speakers – Barkin, Goolsbee, Kugler, Dalay – as well as Governor Bailey from the BoE.